What could happen if a customer pays after the payment date and a forward contract is in effect?

When a customer makes a payment after the designated payment date while a forward contract is in place, it can lead to a situation where the legal obligations of the parties involved may trigger the need for short-term borrowing. Forward contracts are agreements to buy or sell an asset at a predetermined future date for a specified price. If the customer does not meet the payment timeline, the seller may face liquidity issues, potentially requiring them to secure short-term financing to manage their cash flow and fulfill their own obligations under the forward contract.

In this scenario, the seller is expecting payment by a certain date to meet their commitments. A delayed payment can disrupt this expectation, causing financial strain. The need for short-term borrowing comes into play as the seller may need immediate liquidity to cover expenses or fulfill other agreements, hence the importance of compliance with payment deadlines in maintaining financial stability. This outlines how delayed payments can lead to a cascading effect of financial distress that necessitates additional borrowing measures to mitigate risk.